Blockchain, bitcoin, and other strange words that you wanted to know all-in-one
This article isn’t for blockchain gurus. It’s more for non-tech people who are trying to understand the main principles of blockchain, in plain English.
Blockchain is known as a new data-storing technology. It’s like a global distributed ledger that keeps information about transactions, contracts, and other data. The main idea is that this database isn’t kept in one place but is spread all over the world among all users’ devices being connected to blockchain.
Simply put, every user has a personal copy of the encrypted ledger. This database has a history of all transactions like how many coins and when they were sent. The ledger doesn’t know users’ real names just data about transactions. All copies of all users are being synchronized and updated all the time in order to keep data authentic. So, if a hacker decides to make changes in the ledger it won’t be possible because his fraudulent copy will differ from copies of other users.
Why the word “blockchain”? Technically, this is a chain of blocks in a computer code. Every block stores data about specific actions. Here is an example of how the process works in Bitcoin.
Each block may contain up to 5000 transactions. The chain is being created block by block and can’t be changed, deleted or hacked easily. All data is decentralized.
To participate in blockchain, you must have a computing device with installed mining software. The resources of your device will be used to perform transactions, and you will be called a miner. So without miners and computer resources, the system can’t function.
Who Needs Blockchain
Blockchain isn’t the final product on the market. It is a concept. It is a foundation for developing products and services for all businesses and consumers. The core idea of the blockchain is decentralization and secure data-storing. Bitcoin is the first blockchain-based product.
Many spheres are interested in the new technology: banks, fintech (financial tech companies), logistics, healthcare, copyrights, votings, and many more. Blockchain is still young but it may have the same importance as the internet has now.
There are billions computing devices on our planet. And every device is its own resource like power capacity. By using blockchain, it’s possible all these resources can be used with a social purpose, like never before.
You may ask yourself why can’t we use the old data-storing solution as we did before. In short, the blockchain technology is considered highly secure and can protect people’s personal data from using it by third parties.
Why is it called mining? Because you have to mine cryptocurrencies almost in the same way as gold miners do. Users who mine in blockchain are called miners. The difference is that the gold miners do that with a pick and shovel whereas the digital miners do that with computing devices like a computer.
In short, miners provide power capacity and other resources to perform transactions and add new blocks. Specifically, power capacity is used to do complex calculations in blockchain. The more resources miners use, the more reward they get like Bitcoin. Power capacity is being produced by graphics cards (GPU) and processors (CPU). Memory (RAM), hard disk drive (HDD) and solid-state drive (SSD) are used for data store.
The are two types of rewards:
• A new block reward — miners can get a huge reward if they added the first block. Plus, miners get all transactions rewards of this block. This is the most desirable for all miners.
• A transaction fee reward — when usual users of crypto wallets send their coins, someone should provide resources to carry out such transactions. And this someone is a miner. They are like contractors and they get fees. The same as with banks, PapPal, VISA and those who perform transactions. In crypto wallets, a fee is set and paid by users who send coins. Miners are more willing to operate transactions when higher fees are set by user-senders… almost like Uber drivers in rush hour.
In Bitcoin, a new block is being added every 10 minutes. A reward for every added block is 12.5 bitcoins which equals around $100k today. Such a jackpot attracts many. Lately, there is a huge competition among miners because in 2017 they started to pop up everywhere. All miners are now joining mining pools to make money. This group-mining approach raises chances to add new blocks faster and as a result get rewards.
Today about 80% of all Bitcoin miners in the world are located in China. Such an outcome undermines the core idea of decentralization and also consumes a vast amount of electricity.
Different cryptocurrencies can be mined and various hardware can be used for that. There are two types of mining scenarios that are the most effective on the market — to mine through the ASIC processor and through the “farms”.
• ASIC-miner — an application-specific integrated circuit. It is a processor designed for mining purposes. The ASIC is able to mine bitcoins faster than other mining hardware but allows for the mining bitcoins only. The productive ASIC costs around $3000.
• “Farm” — an installation of several graphics cards or ASIC’s. It is a large amount of hardware which increases total power capacity and as a result, provides more effective work in the blockchain. The “farm” is also complex hardware which needs additional settings and maintenance experience.
• Cloud mining — all mining processes are done through servers online. A miner simply rents a server remotely and uses it for mining purposes. There is no need to deal with mining hardware at all. The profit depends on the rates of such servers.
• CPU/HDD mining — other ways to mine cryptocurrencies by using a computer processor’s power capacity or a hard disk drive capacity. The advantage of HDD is that this kind of mining isn’t so energy-hungry as ASIC or GPU, but the profit will be lower.
• Smartphone mining — is a less effective way to mine cryptocurrencies due to weak power capacity. It may be used to try the mining process only.
• “Hidden” mining — is the most abused and deceptive one. It’s when a miner with hacking intentions is using other people’s hardware to mine cryptocurrencies. It’s like a mining virus which “eats” resources of your device remotely.
The world has become crazy and has started to invent various ways to mine through IoT devices (Internet of Things). Some of these ways are weird. Such as toothbrush mining (while you brush your teeth) and TV mining (while you watch the TV). Don’t be surprised if someone invents vibrator mining. (You get the idea).
Any person can use a cryptocurrency. You don’t have to be a miner or have blockchain experience. Bitcoin, Ether and Litecoin are cryptocurrencies, and they can be used for payment. It is like a digital dollar that can be applied online without banks or intermediaries (PayPal, Mastercard). All cryptocurrencies use encryption and all transactions are confirmed in blockchain.
Many goods and services can be bought in crypto coins as easy as credit cards. Cryptocurrencies don’t depend on any government or economic situation. Market demand and speculation have the most influence over rates of crypto money.
• Bitcoin (BTC) —the first cryptocurrency was invented as a peer-to-peer electronic cash system by Satoshi Nakamoto in 2009. Bitcoin has the largest market share, and now is at its highest (~$7000 per coin). At the end of 2017, this currency even skyrocketed up to $20,000 per coin. Bitcoins also have small units for micro-transactions like a cent. It’s called “Satoshi” and it equals $0.000070
• Ether (ETH) — the Ether is a cryptocurrency of the Ethereum platform. Both were created in 2015 by Vitalik Buterin. The difference between Bitcoin is that Ethereum provides more benefits than just crypto money. The platform is used to develop decentralized applications including smart contracts.
Here below are the historical rates of Bitcoin and Ethereum cryptocurrencies since 2009:
Today there are about 1500 different cryptocurrencies. The market capitalization is about $300 billion and it’s constantly changing. It is impossible to predict crypto coins rates. They always rise and fall. Marketing has a big effect on the cryptocurrency bubble.
How Can I Get Cryptocurrency?
There are many ways to get crypto coins. To receive them you need a crypto wallet which you can sign up as easily as a new email account.
Here is how you can get coins:
• Cryptocurrency exchange — a business that trades digital currencies and works like a typical currency exchange.
• Online — is like buying a t-shirt online using a credit card.
• Friends — if they have coins, they might send you some, but might not.
• Mining — you can provide the resources of your computer in blockchain and get a reward in cryptocurrencies.
• Crypto marketplace — you can sell anything for crypto coins, for example, the t-shirt you bought.
• Crypto ATM — yes, it’s even possible to buy digital coins at ATMs for cash.
Some US and GB banks started banning buying cryptocurrencies with credit cards (not debit). The main idea is to not let people buy up crypto coins like crazy and get themselves into a huge debt in case cryptocurrencies go down. This has happened before when Bitcoin rates dropped dramatically.
Crypto wallet is like an e-banking account. You can send/receive coins, check balance or transaction history from any device anywhere. The difference is that your cryptocurrencies don’t belong to any bank or third party. Nobody can check or seize your assets unless they get your wallet.
Here is a user interface reference of how to send coins in a wallet:
Of course, crypto wallets have their own requirements that can be described as difficult for some people. In addition to using a password, you also will have to deal with additional measures of security. It’s called private and public “keys”. They are used to secure transactions and your coins.
As an analogy in real life, a mailbox can be a good example of how such “keys” work:
So, when you get a new crypto wallet you also will have these “keys” in your profile:
• A private key — simply put, it is a like a secret personal code that allows you to spend or send coins. You don’t have to use the key because most of the wallets get it by default after your registration. You just need to keep your private key in a safe place in case your computer gets broken, or you lose access to your account. This key proves you have rights to your coins. The code looks like a set of different characters. See the example below:
Don’t give anyone your private key. Any intruder will be able to steal your coins knowing this code.
• A public key (an address) — is used to receive coins. It is like a checking bank account number. If you want a user to send you coins, give him your public key. By the way, having any public key, it’s easy to find out how many coins a user has. Since the blockchain network is fully transparent, all information regarding transactions is available, except people’s real names of course. Bitcoin Block Explorer blockexplorer.com is an open source web tool that allows you to view information about blocks, addresses, and transactions on the Bitcoin blockchain. The example of how a public key looks like:
• Seed — this backup feature works like insurance. It allows restoring access to the wallet in the future in case you don’t remember the password or you lost your computer/phone. Also, it’s used to sync different wallets. The seed usually has a 12-random-word code that you have to keep in a safe place as well:
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It is better to back up the wallet in case your computer gets stolen or broken. Nobody will provide you with any support like in banks. There is no such thing at all. Everything is up to you.
Over 2 million bitcoins were lost (even don’t try to convert it. The amount is immensely crazy). And most of them were lost because users couldn’t remember passwords or they dumped their computers before cryptocurrencies became very popular.
All crypto wallets have their own pros and cons. Which to use depends on your needs.
• Desktop — a software for a PC or laptop. The app gives you full control of your wallet. On the other hand, it means that the entire security is up to you. If you get hacked or your computer gets stolen, you can lose your coins forever because desktop versions keep the keys.
• Online — a web-based wallet can be accessed from any device anywhere. The main disadvantage is that websites usually store private keys. In this case, you have to trust the website and its security.
• Mobile — An app which can provide access as a desktop app or a web wallet. A mobile wallet allows quick and easy access to your coins like any e-banking mobile account.
• Hardware — is one of the most secure wallets. It is a dedicated device which stores private keys in a protected area of a microcontroller, and it is pretty immune to computer viruses. A good hardware wallet may cost around $100.
• Paper — it is a piece of paper where you can write down or print your keys. The paper wallet is considered as highly secure because you don’t have to use/keep your private keys digitally.
Some tips. Your main assets will be better kept in a hardware/paper wallet and in a safe place. For minor transactions, you can use any other wallet you like.
ICO (Initial Coin Offering)
ICO is used by startups to raise funds for a new project. The same as with IPO (Initial public offering). The difference is that most ICOs have nothing but “white paper” (a presentation on a website of how a startup is going to do business and make money). A new investor of an ICO gets tokens which are similar to stocks.
ICOs have become very popular due to the promising takeoff of Bitcoin cryptocurrency. People have started to believe they can get rich in a short period of time if they invest money in ICO startup. Some have made money, but more than a half of all ICO startups have crashed and burned in 2018. Some of them didn’t implement their plans and other, as it turned out, were just fraud companies.
Token is an asset and a share at the same time. They are used in ICOs. When you invest in a startup, you get tokens. After the ICO, tokens can be sold for a cryptocurrency. There are two types of tokens:
• Utility tokens — are a cryptocurrency which can be used to buy goods or services. Some ICO startups have their own services which use tokens for internal transactions. For example, a taxi cab service that allows paying for a ride in bitcoins.
• Security tokens — are known as dividend tokens. It is like a secured bank deposit which can’t be withdrawal in a specified period of time. As a result, holders of security tokens can get a profit in the end if they are fortunate of course.
The best way to get tokens is to buy them in pre-ICO phase when tokens are low-priced. The only problem is to find a company in which you can trust.
A computer algorithm is used for preserved control and self-execution of agreements signed in the blockchain. To be clear, it is a digital contract with specific terms and obligations, and it can’t be changed or deleted. The main idea is that this algorithm supervises contract terms automatically, and fines both sides for any violation. With smart contracts, it is easy to do an exchange of cryptocurrencies, property, stocks and other assets without intermediaries. You can even get married using a smart contract, and it will be forever.
Smart contracts have a lot of prospects and can be used almost anywhere. For example, with a smart contract, you can securely buy an apartment remotely with a proper property registration. Sounds simple, but on the other hand, smart contracts still have technical difficulties and regulatory issues.
Node is a device connected to blockchain. That is to say, every miner has their own node(s). Every node is a part of the ledger, and it verifies, confirms, and stores transactions in the network. The more nodes the network has, the faster the transactions can be operated. For example, sending/receiving a cryptocurrency.
In order to work properly and securely, a blockchain network must have its own consensus. Consensus is like a protocol, a set of rules which have to be executed by all parties. These two are the most popular:
• Proof of Work (PoW) — the idea of this consensus is that every miner gets a reward according to resources being used in blockchain. That’s to say, the more a device works, the more a miner earns. As a result of this consensus, all miners buy up all mining hardware like crazy and do mining day and night. This approach wastes lots of electricity and energy. Developers now are seeking better alternatives.
• Proof of Stake (PoS) — is a less power-consuming solution which isn’t quite mining because users don’t have to over-use resources like they do in PoW. In PoS miners are called forgers. To perform transactions, a forger must be chosen in a random way depending on his stake (how many coins a forger has). So if a forger has 1% of all coins, he will be able to confirm 1% of all transactions not more. Let say the forger makes a bet in crypto coins. If the forger is chosen, then he is allowed to perform a transaction. In the end, the forger gets a fee which is based on his stake. In PoS, mining hardware isn’t as important as in PoW. This consensus allows participation in a blockchain network even using a desktop computer.
Thanks for reading the article. I’m interested in blockchain-related projects. Drop me a line if you have one. Let’s make the next success story together.